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tv   Charlie Rose  WETA  November 4, 2009 12:00pm-1:00pm EST

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>> rose: welme to the broadct. tonight, a looat our economy, first wi the director of office of management and budget, peter orszag. >> concern abouthe deficits widespreadut all of the specific steps thayou could ta to address th deficit run into eithe constituency politics or other problems. it's soery popular to complain about the defitbut many of the specif steps that you uld take to addresst are unpular. that is th fundament challenge that we ar facinand this w need help th from the american public and congressn addressing. >> re: then popularr thor distorian neal fergus. >> the u.s. continue t run the deficit over a tenear horizon. and ifou look fther than ten years-- because it's very portant to do tha- and take in account the unfunded
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liabilitys of th medicare and social security syems, the position of the unitedtates verges on bankruptcy. becauselthough we have a $10 illion debt, the unfunded abilities are $100rillion. th's something that see to me one can likely dismiss. >> rose: program note. we intded to show you this eveng interviews with our friends malcolm glad well and job hn grisha but because of the onomic story, we will show u those interviews at aater me. tonight, orszag and ferguson when we continue.
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captioning snsored by ro communications fr our studios in new york city, this is chare rose. >> rose:eter orszag is here, he is e director of the offe of magement and budget. called more than just the budget dictor by the "neworker" magazine, he's deeply invold in predent obama'smbitious domeic agenda as well. that includes healthcare, energyolicy and entitlement reform. he's focus tongountry's long-term fiscal health. the adnistration rectly released proctions showing deficitsrowing by $9 trillion over the next ten years. speaking at new york unirsity earlier today, peter orszag said e government is permitted to putting the coury back on firm fiscal footing i'm pleased to have h back at this table to tell us how they're going to do that. welcome. >> thanksor having me. >> rose: everywhe we go, whver wealk to, says in the
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d on main seet on wal stre, among foreign leaders who stop atthis table the worry about e deficit. does america have o much debt that i cannot bring the political willo do something about it. >> rose:ell, let'sealize we actually have two deficits. onisthe fcal defit this which we need t bring down, but we also havehis g.d.p. deaf which were trying to work our way out of. rose: explain the g.d.p. deficit meaning. >> there's a gap between how much the ecomy could proce d how much it's currently proding which at the beginning of this year was estimatedo ount to more than a trillion dollars. to start to fill tt hole, we had take steps like the recovery act to try to get the ecomy back on its feet. so the problem wouldbe challenging if it were just a fiscal one. buwe have theual deficits and ne to address both. and that mak it even more challenging. >> rose: because t current accounts deficit a well.
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>> which is a refction... now one of the string things is we really are livg in an exceptional time. normally higherudget deficits-- and, again, last year we had1.4 trillion deficit... >> rose: this ishe fiscal year that ended in stember 31 of 2009? >> correct would show up as some combinion of higher intest ras and increas borrowing fr abroad. some combinaon thereof. instead wee seen veryow inrest rates and a declinin the currt accountdeficit from 6% of the economy in 2006 to under now. >> rose: because of t economic cris we're going throu. >> because of the ecomic crisis that we' going through in a sen, for rht now, at least,he treasury ishe last borrower las standing. and if you look at total borrowg, public and private combed, it's dow dramatically er the pass three years. the reon, however, and that reflects the exceponal economic downturn th we've been experncing, the reason need t addressoureficits on a goingorwardasis is as private borrowing srts to pick upgain, as consumption and
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buness investment start to pick up again, that will no longer be the casend at that point financing th deficit will be crowding out private invest or causing more borrowing from abroad, and that's a problem we need to.... >> re: that's a daster. >>hat is... we need to... as i id this morningthis is the serious problem and the outyear deficits a unsustainable th have to ce dn. i also, though, think recognizing th problem and the need for action, it is worth pausing and remeering how we got here. you mentioned that $9 trillion projected decit over the next decade. that basically reflects three things: the first the failure to pay forwo policies in particular, the 20 and 2003 tax cutsnd the medicare prescription drug befit. those were deficit fanced. over the next decade they account for $5rillion. seco, t economicdownturn because it triers the so-called automatic stabilizer which is raisenemployment benefits, raise food stamps
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they cause... revenue nds to declinduring an ecomic downturn. all of which is benefici because it helps to mitigate the g.d.p. defit that i was talking about. it alsodds $3.5 trillion to the defit. finally, the rovery act accounts foress than 10% that total. so basically, the $9 trillion projected deficit c be entily accounted for by the failure to pay f policiesn the past, the economicdownturn, and the ste we'vead to take to combat that downturn. which is not to say action isn't necessary, it absolely is. but it's impornt toealize we didn't get here by accident. >> rose: is this administration in favor of extendi unemployment benefits? >> there are whole serie of questions that we ar facing as we come the end of the year includg unemploymt benefits. i pect there will be some exnsion of umployment benefits. >> rose:ecause people like arianna huffington are going around saying to mend others that the problem is with the
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administrations larry summers is against extending unemployment befits. i don't want to speak about the vie of iividual members of the enomic or other parts ofhe administration, but i don't think at's the view coming from the administratio or, fnkly, from any members of the economic.... >> rose: anybo. because the decion had been made or because tt would not be the decision? i don't think... have not hearany commentary suggting that any one is oosed to extending unemployment benefits. >> rose: so larry summers or anyone ee... >> ain, i don't want to get into specific intern discussions, but ion't think th. >> rose: when u look at $1.4 trillion deficit for the mt recent yea last year, 2009, you are by the end of the first term of this admistration-- t knowing whether ere will be aecond term or not-- saying you're goin to half tt deficit. >> yes. that's a commitmen the president made and we arin the mit of a policy process. we have a buet cominout in february.
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that budget will include proposals to puts back on a fiscally sustainable coue and also reflect cutting t deficit in half by the end ofhe president's fit term. >> rose:nd what a those proposals? >> without speaking tohe internal process.. >> rose: fair ough. >> ...ther are both process suggestions. for example, tre's lots of discussion ithe congress about whether aiscal commission would help and wean talk more about.... >> rose: a deficit commission, essentially. >> a deficitommission. nator conrad, for exale, has been a leader in putting that idea forwa. others are comi forward with specific ideas about how to save money. i' give you a simple example. we went t and aed federal employs "what would you do to make your ageies work more efficiently." througthe what we call the save award. weot tens of thousands of responses and we're reading those. members of congressre also writing letters and feeding to this pcess. sohere's lotsf ideas floating around. so in february we'll come forwd with our judgment out
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the best way forward. >> rose: tell mehow you feel about alue-added tax as an additionalource ofevenue. >> that is an idea that ha been talked about in academic circles. i han't heard any direct policy dcussion of tha kind of propol. >>ose: does it hav merit? >> there are academic arguments in favor of it; therere argunts against it. >> rose: well, people like rer altman comto this program, formereputy secretary of t trsury... >> ...and tal about it. again, look, the arguments that have been put forward f a vae-added tax, other countries do it, it c be inhose other countries a sufficit way of raisinrevenue. on the other hand, there's concerns out its regressivety and abou how it would interact with the rest of the taxode heren the united states. anwe don't have a value-added tax. so,gain, i don... again, it's been dcussed in academic circles. i ha not heard serious policy diussion of it en coming from citol hill. so it seems likeore of an
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academic idea at thi point tn an idea that's directlyn the mix in terms of policy. >> rose: what's going to be the biggest contributoto dicit reduction? >> well, over the long term i thk we need to be ver clear that it is not possible t tax your way out of the fcal trajectory that we're on. and further more,it's not possible to reduce spending outside of health care sufficientlyo addressur.... >> re: that means defse d... >> rht. our longerm fiscal problem is dispportionately influenced by the rate at which heah care costs grow. >> rose: right. >> over th next five or ten years, the sittion is a little bit different and the mixmay vary. buover the next 20, 30, 40, 70 100 years, the key thing is lping to reducehe rate of growth in health ce cts. wiout that, notng elsee do will matr. >> ros and so the bill is that's goi to come out of the congress is going to be deficit neutral. you've guaranteed that. >> the bill..and, in fac, you've alrey seen in tms of
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the scoring from the congressional budgetffice, bothhe sene... the bill that came out of the senate finance committee and the bill beg consered by the house of representatives is not only deficit neutral over t first deca, but both ofhem reduce the ficit in the second decade. and i think it's impornt to emphasize that's witht counting anyf the steps th will help transform the alth care system a move it towar onehat's oriented towds ality rather than quantit so it's basically to first proximation, at least,ot really counting the effes of moving tards bundling payments accountae care oanizations, the affect on quality from a variety of chaes that are included in the legislation. >> re: do i hear you saying the most impornt thing we can do is to g r... get heah careosts in control under control? >> in terms of the long-term fisc as opposed to the medium-term, aolutely. more will be necessary we face a deficit in social security and therere other problems. rose: medicare and..
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>> dicare and medicaid are the key drivers ofour long-term fiscal problem. in order to help contn their cost growth erhe long term, need a newealth care system th has digitized information, so health informaon technology in which tt iormation is used to assess what's working d what's not more intelligently and which we're paying for quality rather an qutity, ile also encouraging prevention andellness. >> rose: on this pgram with you is neil ferguson, who you ow well... or roh of, know his ideawho basically is arguing that we ve a huge problem facing ubecause we can't deal with our defit and some point the chinese fefkally are nogoing to take our debt anymore, they'll fi other places to investheir money. and wh that happens, there no political to deal with the deficit. >> let's first be clear about
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the immediate situation an why we'reager to addss our medium tm deficit. first, with trrd the medium situation, long-term rates rema quite low,under 4 if that's coinued throughout the rest of this yea, it thery lowest nominal interest ra since the 1950s. the current count deficit whh is a refleion of how much we're borrowing from abroad has fallen in half as a share of the econy over the past thr years. >> ros how much of that is because of t global economic receptn. >> my point is for right now u.s. treasury securities rein the safestnvestment in the world a we are addressinghe immediate economic cris as we should be. and i thinkin my discussions with chise and other creditors there's recognition of that there's also recognition that we need taddress the key driver of our long-term deficits, health care. one of the reans, however, that we nt to get ahead and as soon as we're done with health re turno reducing our meum-term deficitss to me
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re we don't wind in the situation in which investo confence starts to turn and there are concer about the trajectory wre on. we need d are committed to getting ahe of that sothat we don't face a fiscal crisis. nooil. >> is the belief of the administration tt the idea of defit has traction as a huge problem inain street in and it's n just an idea that is talked aut by people w have a great knowledge of nance. >> i think so, the problem is not lack of conce about the decit, there's plenty of concern about the deficit the oblem is concernbout the deficit is widespread, but all of the specific eps that you could take to address the deficit run into eher constitucy politics or other probms. it's so ver pular to complain about the deficit, but many of thspecific steps that you could take to address it e unpopular. anthat is the fundamental
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challenge that we are face d that we need hel both from the ameran public and the ngress in addressing. >> rose: what ar your numbers for next year? for 2010 in terms of economic growth? >> well, we are acally going to be dating our economic sumptions as part of the budgethat we put out in february and i'd like to reserve an upted set of proctions for thatoint. >> rose: i it ave 3%? >> it is worth noting that currently theast quarter, as you kw.... >> rose: 3.5%. >> ...the economy grew at 3.. one of the thing looking forwd in 2010 that we are moniring is state andlocal governments ce significant deficits and that will be a drag on the econy. th inventor cycle,hich will help to push economic growth... propel economic growtlater this year and into early next year maytart to reverse. >> rose: there's also this queson, and it' raised about th chineseprojections and raed about other projections. whose assumptions d you use?
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what numbers are vooiblo base your decisions? >> wl,e... theost recent seof projections that we used for mid-session review we very much in ne with the blue chi private sector forecas >> rose:kay, this is goldman sachs and j.p. morgan and a whole variety of peoe that do that. >> and without pre-judging exactly where wind up for the february budget, i wouldxpect them again be in lin with private sector forecast. and i think that is...hat helps to providcredibility to the effort tt we'r undertaking. our numbers are in line with other outsiders, so tt there's no conrn they're bei lted one way or another. >> rose: wt's happened to yog people in thisecession? >> well,ne of the things that i touched upo my speech in this rn sthag recessions hit young people particular hard. not only if thr parents are la off in which there's an effect on high school dropo tes, but even for those who are not directly affted. their parents or famil members
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are not unployed. graduateing into a receion has an adver impact on your wages and is affect persists and rticular the evidence suggests for each percentagepoint increase in the unemployment te, initial ges are depressed by 6% upon graduation and even 15 years after graduation are sti 3% lower than otherwise similar gduates in other years. and that's fo each percenge poinincrease in unemployment. for those who a college seniors today, when they entered college, the unemployment rate was about 5%... rcentage points lower an it is tay. so you can multiply those gures to get the ultimate impact. >> rose: how do y factor in two thing one is interest rates and where ey might be in a desion by the feder reserve. and also how do you factor in what will be the dollar which will have an influence on exports and imports? >> in these econoc projections? >>ose: in your projections. again, a variety ofeconomic variles, not just the ones that you mentioned t also
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inflation and whole sers of otherassumptions go into the macroeconomiprojections that form a key part of our budget ojections. >> re: when you look ahead, wh boar reis you the most. >> well, balancg the key competing defits. e very real deficit weace in terms of economi actity becae in terms of prospects for youngraduates, they're ing directly affecte by how aggressily we attack that oblem. unfounately, there's se teion between those two issues. how qukly one should move towards fiscal deficit redtion d away from trying to address our short-term economic crisis is one of the key thing th.... >> rose: show mow me how that tension takes place. >> in partular in theshort ruin an economi crisis lik we have faced, is a higher
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deficit helps to bolster maoeconomicdemand, there, foexample, helping aten wait e effect on new graduat. in other words, in an economic isis like we face hi,er benefits promote macroeconomic activi. over theedium term,owever, the situation flips. imagine a bids, for example, at had a business pn of rapid growth for a year or two to address some crisisand then dramatic decli. that would be a very difficult business plan to execute off. that's precisy what we need to do as a nation. >> rose: do we need a stimulus? >> again, growth was 3.5% in the thirquarter, the laborarket remains unacceptably weakwe e constantly reassessing our options withegard to boosting job growth but for rightow, at least, we are in the mode of carelly monoring and
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asssing options. >> rose: here's wh paul krugmasaid on monday. hat i keep hearing fro washington is one of two arguments, eitherhe stimulus has failed so we shouldn't do anymore two e stimulus has succeed, g.d.p. isrowing so we don't need do anyme. th truth isthe stimus was too little of a good thing, it help but wasn't big enough, seems to be too comicated for an era of soundbite polics? can we afford doore? we can't affordnot to." paulkrugman. >> well, again, i think whate did was aery aggressive step, much moreggressive than many people wanted. it's yielding befits. we're eing it play out and assessing the situation. >> rose: what n't you know that you wish you knew. >> oh, boy, how long do yo have. (laughs) rose: it will hp us understand your lemma if u'll tell us that. >> i think there we twor ree things that if i had a crystal ballould be.... >>ose: enmously helpfulo you in your job. >> b we need to realizethat crystal ball doesn't est, at least with perfect clarity.
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one is t path of economic recory and whether we will or wot face anssue in 2010. e of the things we want to the avoid, and i think it's crucial to avoid ise don't want to repeat the mistake of 1937 en fiscal support forconomic for the onomy, thatfirst catory we're talking about, was withdrn too quickly a we threw the economyack inton ecomic downturn. that would n be good for anyone and we ne to avoid tha tcome. so cominback to t discussion we had earlier, if knew for sure how much the escape locity was in ter of economic activity and whether that wld outweigh the drag from state and local deficits, the inventory cycle and other forcesthat would be enormously helpful designing thept malphtor best path forward to move from a period in which we need hhereficits temporarily in order to help support the
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economy, in needingower deficits to avoid harming t ecomy. >> rose: anoer thing argued by niall firsdegree swhon ion this proam that i taped earlier, it is at... he says that.. he asks this question. do the pple in washington unrstand that inevitably china is going to ha a lger economy than the united stat and a me donant economy than the united states. >> wl, there are a series of academ analyses that ggest wh that potential crossover point could be. >> rose: somewhere bween2025 and050. >> one of the things that of course becomes difficult i projections that far out or subjecto significant certainty. i thin rather than ting to point point that date,he more point thinfor us to do is to be investing in as much as we cain making our economy as oductive as possible. that means not only addressing the problems we have aeady discussebut importantly things
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like things like continuing to imove our edutional system. >> rose: clime change, infrastructure. >> so there's actuay another set of deficit that we havet touched up in terms of investg in key priorities lik education, like infrastructure, li protecting the plat. >> rose: that was part what the stimulus progr is suosed to be abt, wasn't it? the recovery act involved starng to address some of those issues. it's n a panacea. >> rose: if you look at the economic growth ratehow much of it was because of t stimulus program? >> well,stimates suggest that the recoverycted aed three to four percentage pois of economic tivity in the third quarter and overall economic growth wa.5%. so one can say that allf it can be attributae to the recovery act rectly or indirectly. you need to rember that 3%o 4% estimate the recory act involves affects inrectly on consumption for households and it's not... peopl think
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recovery act, government spending and instead a lot of the fact is tax relief which then spurs househoonsumption or added economic activy whh help businees iest. and so a lot of the effects are indirect >> there h been a releasef ople from e business communitwho visited the white house-- d by that mean no necessarily the present but include the psident-- butit's executivesike jeff immelt and others, it' all public out there on theecord now. what are they telling you,hese business people? you just came fm meetings in new rk with business peopl are they tellingou you're not doing enough, want you do? t your hands off the econo? whatre they sayi? >> it varies, as you would expect. >> rose: or get your hands off the private seor? >> it varies they are, likes, monitoring the labor market and whetherob growth is pking up. >> rose: but do they seehe world like you see it for the mo part? >> well, for the most part in
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rms of uerstanding the dynamics they wi often reach somewhat dferent judgments but that's nural and their judgments are not alconsistent withne another. >> rose: i uerstand that. but what'she greativide? is there a basic divide between what you're hearingfrom the business comnity and what you're doi? >> i don know that i would point to a bigivide. i think, again, there's been a siificant amount and, frankly, e of the things that's beneficial in terms of outreach not only to liz beaders but also to progressives d unio is to makeure we're hearing their concerns a can deal with them. >> rose: that you're listeni. >> that we're listenin >> ros what's the gat debe withinhe administration about where to go. we clearly know, sort of, what the... we ow what the scussion is about afghanistan. it clear. we've heard. there's be enough reports about this reconsideraon of a strategy. wh's the... >> well, i hopet's enough of a family that we' t going to
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air ough of the laundry.... >> rose: it's n laundry. it's helping usnderstand the debate that's ing on. >> i would like to ptect the internal discuions. >> ros i'm not asking you to ll me who's dng what. i wa you to tell us, my audice, exa play's the push-pull that you gs are trying to figure out. >> some of the tension wes fac the dressing, the short-term macrohole at theame time we face a long-rm fiscalproblem. constantly aessing the state of the labor mart and whether additional eort is or is n warranted. a set of decisions that, again r not surprising abou whether various provions that are expiring at thend of this ar should or should not be extended. >> re: like tax cuts? oh, unemploymt benefs, right. is up >> those expire at the end of next year. and then, of course, tre's ju a whole sees of otr policy issues a consttly in the mix fro implementation the recovery act, we have portant investments health
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information technology a broadband which there are pocy discussions going on. so a very active internal discussion. >> rose: i he you'll come back and tell us abo it. i will come back, i don't know how muc i'll tell you about . thank you. >> ros thank you very much. a pleure to have you on the broadcast. >> i appreciate bei here. >> rose: peter orsza, the director of office ofanagement and budget. he's the man that between now and febrry will put together yourudget. then once puts tether your budget congress ll consider it. backin a moment with niall fergus. stay with us niall ferguson is here,e is an economic histoan, a profeor atarvard, he is an author you may also be familiar with his docuntaries broadcast on pbs, his writings about the economic crisis and a potentialupture in u.s./china relaons have
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received much atteion and controvey. his most recenbook is now in paper back, it is called "the ascent of money, a financial history of theorld." i am pleased to have him back at th stable, welcome. although it s a different table that we sti use. this is a lite smalr table. >> did you break it? did you thw it at somne? >> re: (laughs) turned iover on them. okay, economic recovery. in the united states, quarter, 3 .5% growth, is there a gbal economic recovery unde way? >> i think the's alobal economic recovery which looks actuallyrather more sustainab than the u. recovery. most of e u.s. recovery is in the form o smulus from governnt, the cash for clunkers program a the couragement to first tim home yers. that accoted for a really large perntage. >> rose: more than 50? >> pretty close t half. you add thos two thing togeer then the rest of has to do with inveories. i n't think this is a sustainable recovery yet.
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the recession is technical over but iill beery surprised if the nex arter's numberare as good because these progra are exring or have exped. the global recovery is more interesting because chi and not only chin also iia and brazil, pl a whole bunchf other mainly asian economies are growg much faster tn i think anody would have predied six months ago not manypeople back in in the dark days the spring thought that even china wld bounce back ts strongly. butith growth now at an annu rate o around 10% and intereingly consumer grow in china gring even faster than that, there's clearly a obal recovery. buthe engine of growth not the united states. for the first time-- and one might say in a century-- the engine of growth in theworld economis no longer thunited stes, it's china. >> rose: but it hadn't been th united states for a numberf ars. >> the engine o growthin the world economy s china plus the ited states in the last ten years. was very much cna plus the united states. you can figure this out.
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if you look athe decade running up to the cris, 1998 to 2007 two fifthsf total growth in th world economy w china plus america. buof that two fifths, the united states wathe lion's share just because it's still the biest any the wod. rose: and how much it these do witthe chine stimulus? a lot becaus that in relative terms is very, very big shot in the arm of china's economy. plus, china's stimulus kind of works better. it turns out that.... >>ose: that's e way it is with command economy. >>ou have have kings in policies where you aim to stimulate demand rough masve government expenditure more easily in a contrled economy than in an open economy le at of the united states. which is a point the canes made in the 1930s if y look at t 19 classic. the german edition, cane ys th the policies he recommends of deficit-financed government pump pring will work better in a contrled talitarian economy than in a free open
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economy and that stillrue day. >> re: so what's this sort of. your ownense of the american economyver the next two or three yea? >> well, i'm ratively pessimistic aboutaw howe fast growth is going to be. the administration earlier this year forecasthat the onomy would grow next year by 3.5%, then b 4%, then by 5% after that. i ink that hhlynlikely happen. my guess that the economy wi grow in real terms at closer t 2% a year. for e nextew years. and the rson i think that is that the u. consur just can't bounce back in the way that we' been used to seeing inprevious recessions. we've reached theimits of verage on househo balance sheets. when you've got debts equivent round 1% of persona disposab income, there's no way you n go back outo the shopping mall even if thcredit card compaes were cutting you so slack, whichhey're not. so i think if the u.s.consumer is esntially going to be
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behavingn a parsimonious, even thrifty way, there's no way the u.s. economy can growat the rates we'veeen in the past. >> rose:hat the bind we're caught in? on the one hand we' been living in this consumption sociy where china and other places have been a saving economy annow wed we need to be a consumption economy fuel our economy even thgh in the long tm we need to be a sing ecomy? >> i think ts is the prlem and the's no way thayou can have the old style dt-fueled consumption thatas at the heart of our groh really ove the last 20 years once you reach this levelf indebtedne. so that gameis over and wre in the press of a hug global balancing which requires americanto become more thrifty and requires asian to become rather more profligate. we need chinese t gout shopping. >>ose: but that's the concn, whether they have created a domestic deman that will replace th international demand for wt they manufacture >> graduallyhey are moving in th direction but you can' do that sort of thingvernight.
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ere is some evidence-- i was in hong kon rently talking about thisto people who ar expert about the chinese consumer-- the is evidence theyre going out and shopping. there'a bit of a myth that the chinese households a big savers. that's not true, most of the sangs that goes on in the chinese economies by corporations who make mo money than they know what to with. so chinese households are saving less and they arepending more. but you can transform a cultures thrifty as ina's in the ace of a few months. this will take yrs to uold. rose: the key to can t chinese econy is creating a dending middle-class. right. you needhe end to switch china'manufacturing to domestic demd and awa from foreign demand the inese modehas been exrt driven really for decades now, but pticularly for the la ten years. they focused on getting a bigger and bigger mket share, particularly of the u.s. consumer market bualso the europe consumer maetand
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they did this by keeping their rrency weak and by becoming.... >> rose: and enorms pressure on theart of the united states and others to get them to. >> this pressure achieved nothing. on the contrary, when the crisis struck, chi cceled all the slight appreciation they'd alloweand reverted to a straight dollar peg. now, that's reall, rlly imrtant, charlie, because one ey the u.s. can g itself going again is by letting the llar weaken. cause that will stimula u.s. ports and that'something th unofficially, tacit has become american poli. but th chinese will piggyback on that. >> rose: you will never see litician say that. >> they're nulln favor of the rong dollar. >> re: (laughs) extly. >> and the more theyay that, the more you know the dollar is going down. that's a lonestablished americ practice it goes back to the 1970s when john cnolly, e treasury secrery, said to the europeans of the dollar "our currency, yr problem we're doing itgain this tim arou. 's yet another devaluatio designed to g the economy
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going. but the chinese are piggybackin on this because if we goown, e currency of china goes down, too. so interestingly china is not onlyrowing its own domesti demand it's also building u its port market share again. ybody who'sing on the wrong side othat process, like that europeans with their increasinglytrong euro or the japanese witthe strong yen i gettg killed because the chinese are just killing their manufacturing expos. >> rose: let's talk about the prospect for americaecause you make these terrifying analogys to the btish empire. you know, that our best ys ar behind us? that ci mare a, whi was a grand rgain,is going to fall apart. that our dolla will not behe reserve currency. that we are looking at a deficit that is out of control. so we shld just givep. >> one should never giv up. th's anmportant thing to
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bear in nd. but one should always bere of british historians. >> rose: (laughs) extly. >> my friendaul kennedy did this in the late 1980s and it was thsoviet uni.... >> rose:the end of america" or whever his phrase was. >> one has to look carefully that the pblems the united states faces and draw analogys with great cauon. >> rose: b you do it. >> well, ido it. leme put it this way. at the end of rld war ii, the united kingdom w as indebted in relion to its grant as the unitedtates is today. if you include private death, mo of brita's debt w publiceath. today the united statesas a bigger mountain of private debt. they he there's a $9 trillion of culous of deb this there's no questn that' unsustainable. even pl krugman who loves decit would acknowledge that's an unsustainable path.... >> rose: wha did cane say about ficits? >> ce's advice... if hewere alivtoday he woulday this is
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excessive and unsustainable because most of th it is not a canesian stimulus package most of it is strture defit because the united states spends much me every year regdless of wheth thers a boom or bus than it raises in taxation. so this can't be justifdn canesian terms. it a fdamental crisisof publicinance which the political class in washington seems unable address >> rose:nd that's the prlem, they don't the political will do that >> it is question of pitical ll because thenderlying strength of the.s. economy is almo certainly greaterhan that of the briti economy in 1945. but public finance-- and this is one of the poin i try toy make inthe ascentf mon" can trumyour economy even if you have a wonderful work fce, tremendous natur resourcesnd l the rest of it. think of argentina. my worry isot only that ere's a british impeal parallelut also alatin american parallel here at the united states is in danger of evolving.... >> rose: with aentina? >> well, i the sense that argenta was about the fourth-richest coufully the
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world a hundred years a. and over tha one-year period syematically blew it as a resultofismanagement of its public.. >> rose: so e currency was worth nothing. >> currency aft currency. how many currencies did they have how many defaults? >> t united states i on an unsustaible fiscal path and we know that path ends in o of two ways. you either default on the debt or you depreciate it away, you inflate it ay docto your currency.... rose: so we're running t of money beuse we... >> or yocan end upwith too much money. raer the opposite.... >> rose: we run out of mone becausit's worthss or you run ouof money because, you kn you've got all this debt and youan't service the deb >> what you n out of is credit. remember, the united stes reliesn foreigner who hold half t federal debt to finance its borrowing habit. if foreigners lose confidencein the u.s. as a borrower, and if they lose confence in the dollar as a crency, tn things can turn ugl quite ickly. that seemso be.... >> rose: do you think... i talk to these people much as you , as younow.
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they don't see to me that they are about to be frightened by the american econic future. i do not he them saying oh, my god,it's over for america so we beer not, a, byny more llars 0, b,we bette not... bett find alternative investments. >> but these are the same peoe who in late 2006 and ely 20 were tells me and perps you two too that there would never be anoth recession in the united states because the great.... >> rose: what abouthe chinese who e buying the debt? they're saying "we buy the debt becae when we look around it's the best pce, because w still have confidence in amera." >> well, that's not really what they think itay be what the say. two things first of all, they're buyin less tn they used to whene need them to buy lot re. in 2007 at peak they were buying three quarters of all the new debt issued byhe u.s. treasury. now it's about0%. we are issuing much, much more and ty're buying mh less because they kneel $2 trillion is about enough, really. if you look at their
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international reserves which are predomantly held in dollars, they have a huge.... >> rose: it was about a billion dollars a day f a while. >> it was an traordinary ount of money flowing from china to the united ates to finance r borrowing habit. >> rose: so we cou buy their goods. >> so we couldbuy their goods vendorinanced if you like. and it worked ll for a te. but i always arguedthat chimerica was unstable it was pun on the word chimera. it's proved be from the advantagpoint of thunited states... i think it served china much better than it served the united states they haveeen owing their economy at 10% a year, ty're on track to overtake u by 2027. >> rose: overtake us not per capita b overtake us i terms of the size of the econom >> in terms of the grpt. n per cita terms, th will take many, many years. >> rose: a blion plus popution. right. so you they wilappen when? 2030? 2050. >> well, jim o'kneelof goldman chs, his projection was on
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2027 i always joke on april 14 2:30 in the afternoon, china's g.d.p. exceeds that of the united states. but it's in that ballpark. ere hasn't been a point in the last ctury when abody looked like dng that. a fe people thought japan might in the glory days of the 1980s. i thk the chinese chalnge is the more cdible one. not becausof the sheer size of china but als because they have a mode that seems to deliver, even iit delivers at the expense of others, that's why i think that you are curncy policy is a sourcef concern. >> rose: but you also argue about china that as thr economy grows, their polics have to change and they're unlike to change andherefore when the ge looksad for them they're gointo turn nationalistic and then the problebecomes an aggressive china. >> ts needs to be a concn as th chinese leadershiphanges. e next generation ofhinese leaders i think wi be more asrtive and they have upheir slve this wonderful tru card. if things go wng-- and they
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may. let's face i, every asian economiciracle is punctuated by at least one financial crisis if things go wrong, thecan call on a formidable popular nationalm. that's a sentiment which we know as historian cans always be call upon when the going gets you have to economically. >> rose: yourremise is sed on t things. one, the chinese political stem will not change, a. and,, the uted states wot have v the polical will to deal with e deficit. >> i think both of those are reasonab assumptions. >> rose: on th very same program that you're on the director of thoffice of management and bget says that we will take theeficit of 2009 and by 2012, 2013, we will halve it. by the time theresident finies the firsterm,e cut the deficit in half. so that suggests some political will, if you believeim, to do it. >> wl, is a. it would still therere be around 6% of
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gross domestic produ. now, that is aery large deficit in any normal circumstances. to halve it from 12% of g.d.p. to 6% dsn'tconstitute fiscal stable sags. you still will be borough around a trillion dollars. >> rose:t constitutes proess for god's sake. >> it's progress. but my qstion is where this their plans to we get to budget balance. it'slear from the forecast that he himself has made that the u.s. ctinues to run a deficit over a ten-yr horizon and if you look further bend te years-- because it's very important do that-- and take into accou the unfunded liabilies of the medicare and social security systems, t potion of the unit stas verges on banuptcy, bause although we have $1 trillion debt, the unfunded liabilitys are $100 trillio that's mething that it see to me one can likely dismiss. >> re: waen buffett as we speak today made a huge multibillion dollar$30 to $40 billioinvestment in railways sang "this is my cfidence in
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the american economy." >> well, good luck to him. >> rose: well, he's... he knows something about onomies and investments, don't he? >>h, sure,and hisrack record has bee very impresse untiso very rently. and it'sbeen less so. >> rose: it waless so last year but it's come back. >> so it's possible tt he's rit and i'm wrong. i don't rule that out. and that all is going to be well and the u.s. is gng to bounce back. >> rose: are you bre paired to say "it either buffett or " in terms of analysis? >> i'm hpy to betith him although i probably can'tut down quite as mh money ahe can in his bet. i'm a hunble academic. it does seem to me a better man would put money on notust china but china' trading partners. i uldrather byustralian railroads than america railads because i know that stuff is beinghipped from australia to china in much largeruantities than is currently being ipped coast to coast the united states. i mean actually, freight traffic u.s. rlroads is at an extraordinary l level right now with very little sign of improvemen so he's a vy optimisc man, i
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would say. >> rose: you think he's making serious mistak >> i do. because i don'see that the united states cagrow atates rapid enough toake that investment pay cheap. though t price may be. now it's reckless of know take on waen buett. but you know wt? >> rose: what? >> thiis a moment in history when the things at have been true for his entire life ma ve ceased to be te. the biggest problem tt anybody faces today is that their lifetime experience-- even if their li as long as warren buffetts-- is no longer a reliable guide to theuture. why? we just missed a great depressi by a hair's breadth and we missed by throwing a vast qntity of money at the u.s. economy. by running a deficitas large as we ran in wod warii in peacetime. nobodynows where thatill create unintended consequences that will slow the economy down. mynstinct is that it will. >> rose: let me go to a tgent al quick. s this the wrong thing to do? to throw that money at a te that 24this economy needed
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somebody to do something dramic, are you suggting th the things ty did was wrong? >> no. there were two policies, one of th which was moremportant an the other. the monetary policy that ben bernanke pursued at the fed rticularly after the lehman crisis laugh yeast, a massive expansn of theonetary base was the right policy. that's t policy milton freedman would have recommded. >>ose: who was a monitorist. >> and saw the cause of th eat depression as being bank failures and metarytightening by the fed. we learned that lesson. the other policy, the cesian policy, invols adding an enormous deficit on top ofn already large structural defici and i n't think that that has been anything as impornt in getting theconomy out of the depression scenario. and i think one has to make that distinctio the fiscal picy could turn out be okay as longs we kno how to stabilize it. but right now we don't right now we are clrly out of fiscal control. and at some point, the world is going toake up to that a say
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it no longer sense to lieve pile these bonds up in a reasonable expectati that the unitedtates will either depreciate the debt away by letting the dlar fall throu the floor or will actually start to call into question its own commitment tothese payments. diault is not a scario we can le out, let me put it that way. >> rose: default is not a scenario we can rule out. default on o debt and therefore wh does that mean? >> what wi happen firsts that we'll default on the commitmes madeunder the mecare and social security systems. that fault, the mestic default on our ast were, domest creditors, is an most certain outcome. the onlyuestion is which esident takes it? which president grasps thatnd admits weannot possibly lfill those mmitments? the other questionf default seems me less likely. we're not liky to default on r outstanding bonds held by foreigners. but foreigners m begin to question the sustainabity of a fiscal poly that requireus to borrow a trilon dollars a ar.
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wh they'll do wh we do at.... >> rose: erybody believes that. everybody... wait, stop. everybody belies that you cann... >> think of at that means. >> rose: you cannot contin at the pace. everybody agrees witthat. but ey don't necessarily assume there are not polies and actions that c preventthe disaster of default that youre aring are inevible. >> of course they ar for exampl the united states could intduce a val ded tax. >> rose: right. >> or a federal salesax. >> re: right. >> can you imagine is congress do that? >> rose: i don't kw. depends on the options they look at at t time. you have peopl like rog altman coming on thi program saying "ey're going to have to have a value added tax." if thelook at this thg and niall fergon is saying "this is the disaster youface," perhaps they'll say, tnk you, nial we better something and add a value added tax. maybe they'l believe you have to change e taxing policy. >> but remember winston churchill who said the united states ds all the right thing when all the other things have
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been exhausted. the reason i mention default is not bause i thk united states is going to turn into mexico or argentina overnight. >> rose: well, you almost suggested th earlier. >> let me make thi clear. ed for the to persuade iestors to continue to buy u.s. government bondse'll have to offer them a higr interest rate for thei money. now, wn that haens, the bonds go down in price, the yields go up, our fiscal crisis immediately gets worse because the cost of servicing vast $10 trillion debtoes up. at's what worries me most. because what you could then g is situation where real interest rates gup. and tt's scripin for a heavil indebted ecomy, just as it's crippling for a healy indebt household. that's why i worry about buffett's bet. th's why i think the u.s. could slow dow in 10, 2007 t speeding up. >> rose: who do youknow from academe yashgs government,all streetthat believes exactly you say? >> let me name just one. >> rose: name justne. ken rogoff.
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>>. >> rose: he's coming this week. but he comes from the me place. >> he comes from the me unersity but not the same place. he's a very distinguished economist whosed to be in the inteational monetary fund. hend i think very similar ways about this problem, to name but one. i think if y were to a george ros is he optimistic.. >> rose: agree george soros... on those ree agree. so what about pau volcker, who's a distinguied american... former chairman of the federal reserv >> i think if anything he is more pessistic than the two people just mentioned of crse, it's hard for him to expressublicly his disqut because of his official position. >> ros so you think the obama administration ijust wrong heed? >> no. listen. i n't want to criticize some very cver indivuals who are grabling wita huge.... rose: larry summers, tim geithner. >> these areome of the smartest pple in the world. i have hugeregard for all of them. >> ros so thefore... what's the differce between them and
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you? if the people w have the power... wt's the difference between the pele who have the por... >> charl, they don'thave the wer! the congss has the power! that what people don't understand abouthe situation we're in. right now the prident proposes with his clever advisors helping him but congress disposes a it ll be congress tt decides whether e health care bill ultimately adds to the deficit or does not. >> ros but are you suggesting that if theyalve the deficit in four years, thathat's not putting on the track to a balanced budge they continue that kin of progress? >> it's not because theirer numbs... their ten-yea budget don't put us on course for a balanced budget,hey put us on course to carry on borrow ago trillion dollars year as far as the eye can see. that it see is a recipe for troue. there comes a point-- and ts isne of the lessons of nancial history-- there comes a point when t international markets simply can't take anymore. and what's interesting about this is it's non-linear. it'sot that people gradually lose faith in the credit worthiness of a count or gradually lose faith i a currency as an internaonal
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reserve currency. it canappen quite s.u.d. suddenly. expectations change. that'shat if british experience tel you. in 1945, churchill sll thought of the british eire as a ghty force equal in wer to the viet union and the united states. but it was a heavily indted empire. debt g.d.p. was about 250%. what's more, the britishhen barked on health care reform. the national health service, thinking that they had limitless funds to dote to rewording themselves to the sacrifices. >> re: i will remind u that the american health care system that is prosed is supposeto be deficit neutral >> yes. we'll see. f iteally is. i'd be imprsed. >> re: but here is t idea. nobodyhinks that americ is. e world order is cnging. and you point that. ere's a new economic order and there's a new political order. we know there's a level of sft of power to the east. and the presidt knows it, everody in europe kws it. th's not an idea that people
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are sugsting is not true. >> b it's not that they... don't say it, but do we grasp what this means? for 500 years th world has moved in the direction ofhe west and the unitedtates was the last of the great weste powers to benefitrom this shift of resources from eas to west. we're living through a change that ends 500 years o histo, a great ralancing of theorld at will seesian powers become equalin their statu in ecomic terms and the geopolitical terms. >> ros is it a zero-sum game. >> it can be. >> rose: but is it? not? maybe the united states better off with a smallerhare a larger pie >> of course. but, you know, the shareis always going toe getting smaller these asian economies grow. anas we slow dow and i think the big questio which i n't really see being addressd is how do you cope with e rise of a credible rival? the sovietnion was never going to have an economy the same ze as t united states. it never came close and today russia's onomy is 4%
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the size of the u.s. we are facing a genuine superpower, a real economic rival. and i don't think arican foreign policy has yet adapted to that. i think's an assumption with chimerica. >> rose: what uld it do to ggested the adapted to tt? what would it do? >> let me putt this way. theris a very clea dilemma whh isn't often enough discsed. do we accommodate china's recognize and we accept,s britain accommodate it had rise of the united states, that o day it will b the dominate power the wor and we better li with that. or do wetry to bance it the way the united kingdom ught to balance the se of gmany by making aiance with other wers that region india being the obvious candidate. that's theilemma that' right at the heart of u.s. foreign policy todaynd yet i have the impression we're so distracted by ourolonial rs-- and i callhem coloal wars nsciousfully iraq and afghanistan, that we don't e that picture. the chinese s it clearly and at least one of the superpowers
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in this game is thinking in the rit kind of terms about the way the world is going both economic and geopolitically. >> rose: niall ferguson whose book is called "the ascent of money"hich is the title of his documentary. thank you for joininus. tomorrow night, foer vice presidenal gore. captioni sponsored by rose communications captioned by mea access group at wgbh
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